Eq Derivatives Final

“EQUITY DERIVATES MARKET IN INDIA AND INVESTORS
PERCEPTION TOWARDS DERIVATIVE MARKETS”
Bachelor of Management Studies
Semester V
Submitted
By
Deepesh Chandru Vishnani
Roll no – 70
Kishinchand Chellaram College Vidyasagar Principal K.M. Kundnani

Chowk 124, Dinshaw Wachha Road, Churchgate, Mumbai - 400 020
Equity Derivatives market in India and investors perception towards it
DECLARATION
I, Deepesh Vishnani the student of T.Y.B.M.S. Semester V (2017-2018) hereby

declare that I have completed the project on Equity Derivatives Market in India and
Investors Perception towards Derivative Markets.
The information submitted is true and original to the best of my knowledge.
___________________
Deepesh Vishnani
70
1
Kishinchand Chellaram College
CERTIFICATE
This is to certify that Mr. Deepesh Vishnani, Roll no 70 of Third Year B.M.S.,
Semester V (2017-2018) has successfully completed the project on Research on
Equity Derivatives Market in India and Investors Perception towards Derivative
Markets under the guidance of Ms. Tanzila Khan.
Course Coordinator Principal
Project Guide
External Examiner
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ACKNOWLEDGEMENT
To list who all have helped me is difficult because they are so numerous and the
depth is so enormous.
I would like to acknowledge the following as being idealistic channels and fresh
dimensions in the completion of this project.
I take this opportunity to thank the University of Mumbai for giving me chance to
do this project.
I would like to thank my Principal, Ms. Hemlata Bagla for providing the necessary
facilities required for completion of this project.
I take this opportunity to thank our Coordinator Ms. Ritika Pathak, for her moral
support and guidance.
I would also like to express my sincere gratitude towards my project

guide Ms. Tanzila Khan whose guidance and care made the project
successful.
I would like to thank my College Library, for having provided various references
books and magazines related to my project.
Lastly, I would like to thank each and every person who have directly or
indirectly helped me in the completion of the project especially my Parents
and Peers who supported me throughout my project.
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ABSTRACT
The emergence of the market for derivatives products, most notably forwards,
futures and options, can be tracked back to the willingness of risk-averse economic
agents to guard themselves against uncertainties arising out of fluctuations in asset
prices. Derivatives are risk management instruments, which derive their value from
an underlying asset. The following are three broad categories of participants in the
derivatives market Hedgers, Speculators and Arbitragers. Prices in an organized
derivatives market reflect the perception of market participants about the future and
lead the price of underlying to the perceived future level. In recent times the
Derivative markets have gained importance in terms of their vital role in the
economy. The increasing investments in stocks (domestic as well as overseas) have
attracted my interest in this area. Numerous studies on the effects of futures and
options listing on the underlying cash market volatility have been done in the
developed markets. The derivative market is newly started in India and it is not
known by every investor, so SEBI has to take steps to create awareness among the
investors about the derivative segment. In cash market the profit/loss of the investor
depends on the market price of the underlying asset. The investor may incur huge
profit or he may incur huge loss. But in derivatives segment the investor enjoys huge
profits with limited downside. Derivatives are mostly used for hedging purpose. In
order to increase the derivatives market in India, SEBI should revise some of their
regulations like contract size, participation of FII in the derivatives market. In a
nutshell the study throws a light on the derivatives market.
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INDEX
Sr. no. Particulars Page no.
1 Introduction 6
2 Definition of Derivatives 8
3 History of Derivatives 9
4 Derivatives in India 12
5 Review of Literature 15
6 Development of Derivatives Market in 17
India
7 Factors contributing to the growth of 20
Derivatives
8 Types of Derivatives 24
9 Participants in the Derivatives Market 30

10 Role of Derivatives 35
11 Research Methodology 37
12 Data Interpretation and Analysis 40
13 Conclusion 51
14 Bibliography 52
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1. INTRODUCTION:
Derivatives are one of the most complex instruments. The word

derivative comes from the word ‘to derive’. It indicates that it has no independent
value. A derivative is a contract whose value is derived from the value of another
asset, known as the underlying asset, which could be a share, a stock market
index, an interest rate, a commodity, or a currency. The underlying is the
identification tag for a derivative contract. When the price of the underlying
changes, the value of the derivative also changes. Without an underlying asset,
derivatives do not have any meaning. For example, the value of a gold futures
contract derives from the value of the underlying asset i.e., gold. The prices in the
derivatives market are driven by the spot or cash market price of the underlying
asset, which is gold in this example.
Derivatives are very similar to insurance. Insurance protects against

specific risks, such as fire, floods, theft and so on. Derivatives on the other hand,
take care of market risks - volatility in interest rates, currency rates, commodity
prices, and share prices. Derivatives offer a sound mechanism for insuring against
various kinds of risks arising in the world of finance. They offer a range of
mechanisms to improve redistribution of risk, which can be extended to every
product existing, from coffee to cotton and live cattle to debt instruments.
In this era of globalization, the world is a riskier place and exposure

to risk is growing. Risk cannot be avoided or ignored. Man, however is risk averse.
The risk averse characteristic of human beings has brought about growth in
derivatives. Derivatives help the risk averse individuals by offering a mechanism
for hedging risks.
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Derivative products, several centuries ago, emerged as hedging

devices against fluctuations in commodity prices. Commodity futures and options
have had a lively existence for several centuries. Financial derivatives came into
the limelight in the post-1970 period; today they account for 75 percent of the
financial market activity in Europe, North America, and East Asia. The basic
difference between commodity and financial derivatives lies in the nature of the
underlying instrument. In commodity derivatives, the underlying asset is a
commodity; it may be wheat, cotton, pepper, turmeric, corn, orange, oats, Soya
beans, rice, crude oil, natural gas, gold, silver, and so on. In financial derivatives,
the underlying includes treasuries, bonds, stocks, and stock index, foreign
exchange, and Euro dollar deposits. The market for financial derivatives has grown
tremendously both in terms of variety of instruments and turnover.
Presently, most major institutional borrowers and investors use

derivatives. Similarly, many act as intermediaries dealing in derivative transactions.
Derivatives are responsible for not only increasing the range of financial products
available but also fostering more precise ways of understanding, quantifying and
managing financial risk.
Derivatives contracts are used to counter the price risks involved in

assets and liabilities. Derivatives do not eliminate risks. They divert risks from
investors who are risk averse to those who are risk neutral.
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2. DEFINITION OF DERIVATIVES:
Derivative is a product whose value is derived from the value of one
or more basic variables, called bases (underlying asset, index, or reference rate),
in a contractual manner. The underlying asset can be equity, forex, commodity or
any other asset.
According to Securities Contracts (Regulation) Act, 1956

{SC(R)A}, derivatives is
➢ A security derived from a debt instrument, share, loan, whether secured or

unsecured, risk instrument or contract for differences or any other form of
security.
➢ A contract which derives its value from the prices, or index of prices, of
underlying securities.
Derivatives are securities under the Securities Contract (Regulation)

Act and hence the trading of derivatives is governed by the regulatory framework
under the Securities Contract (Regulation) Act.
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3. HISTORY OF DERIVATIVES:
The history of derivatives is quite colorful and surprisingly a lot longer

than most people think. Forward delivery contracts, stating what is to be delivered
for a fixed price at a specified place on a specified date, existed in ancient Greece
and Rome. Roman emperors entered forward contracts to provide the masses with
their supply of Egyptian grain. These contracts were also undertaken between
farmers and merchants to eliminate risk arising out of uncertain future prices of
grains. Thus, forward contracts have existed for centuries for hedging price risk.
The first organized commodity exchange came into existence in the

early 1700’s in Japan. The first formal commodities exchange, the Chicago Board
of Trade (CBOT), was formed in 1848 in the US to deal with the problem of ‘credit
risk’ and to provide centralized location to negotiate forward contracts. From
‘forward’ trading in commodities emerged the commodity ‘futures’. The first type of
futures contract was called ‘to arrive at’. Trading in futures began on the CBOT in
the 1860’s. In 1865, CBOT listed the first ‘exchange traded’ derivatives contract,
known as the futures contracts. Futures trading grew out of the need for hedging
the price risk involved in many commercial operations. The Chicago Mercantile
Exchange (CME), a spin-off of CBOT, was formed in 1919, though it did exist
before in 1874 under the names of ‘Chicago Produce Exchange’ (CPE) and
‘Chicago Egg and Butter Board’ (CEBB). The first financial futures to emerge
were the currency in 1972 in the US. The first foreign currency futures were traded
on May 16, 1972, on International Monetary Market (IMM), a division of CME.
The currency futures traded on the IMM are the British Pound, the Canadian Dollar,
the Japanese Yen, the Swiss Franc, the German Mark, the Australian Dollar, and
the Euro dollar. Currency futures were followed soon by interest rate futures.
Interest
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rate futures contracts were traded for the first time on the CBOT on October 20,
1975. Stock index futures and options emerged in 1982. The first stock index
futures contracts were traded on Kansas City Board of Trade on February 24,
1982.
The first of the several networks, which offered a trading link between
two exchanges, was formed between the Singapore International Monetary
Exchange (SIMEX) and the CME on September 7, 1984.
Options are as old as futures. Their history also dates back to ancient
Greece and Rome. Options are very popular with speculators in the tulip craze of
seventeenth century Holland. Tulips, the brightly colored flowers, were a symbol of
affluence; owing to a high demand, tulip bulb prices shot up. Dutch growers and
dealers traded in tulip bulb options. There was so much speculation that people
even mortgaged their homes and businesses. These speculators were wiped out
when the tulip craze collapsed in 1637 as there was no mechanism to guarantee
the performance of the option terms.
The first call and put options were invented by an American financier,
Russell Sage, in 1872. These options were traded over the counter. Agricultural
commodities options were traded in the nineteenth century in England and the US.
Options on shares were available in the US on the over the counter (OTC) market
only until 1973 without much knowledge of valuation. A group of firms known as
Put and Call brokers and Dealer’s Association was set up in early 1900’s to provide
a mechanism for bringing buyers and sellers together.
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On April 26, 1973, the Chicago Board options Exchange (CBOE) was
set up at CBOT for the purpose of trading stock options. It was in 1973 again that
black, Merton, and Scholes invented the famous Black-Scholes Option Formula.
This model helped in assessing the fair price of an option which led to an increased
interest in trading of options. With the options markets becoming increasingly
popular, the American Stock Exchange (AMEX) and the Philadelphia Stock
Exchange (PHLX) began trading in options in 1975.
The market for futures and options grew at a rapid pace in the
eighties and nineties. The collapse of the Bretton Woods regime of fixed parties
and the introduction of floating rates for currencies in the international financial
markets paved the way for development of a number of financial derivatives which
served as effective risk management tools to cope with market uncertainties.
The CBOT and the CME are two largest financial exchanges in the
world on which futures contracts are traded. The CBOT now offers 48 futures and
option contracts (with the annual volume at more than 211 million in 2001).The
CBOE is the largest exchange for trading stock options. The CBOE trades options
on the S&P 100 and the S&P 500 stock indices. The Philadelphia Stock Exchange
is the premier exchange for trading foreign options.
The most traded stock indices include S&P 500, the Dow Jones
Industrial Average, the Nasdaq 100, and the Nikkei 225. The US indices and the
Nikkei 225 trade almost round the clock. The N225 is also traded on the Chicago
Mercantile Exchange.
4. DERIVATIVES IN INDIA:
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India has started the innovations in financial markets very late. Some
of the recent developments initiated by the regulatory authorities are very important
in this respect. Futures trading have been permitted in certain commodity
exchanges. Mumbai Stock Exchange has started futures trading in cottonseed and
cotton under the BOOE and under the East India Cotton Association. Necessary
infrastructure has been created by the National Stock Exchange (NSE) and the
Bombay Stock Exchange (BSE) for trading in stock index futures and the
commencement of operations in selected scripts. Liberalized exchange rate
management system has been introduced in the year 1992 for regulating the flow
of foreign exchange. A committee headed by S.S.Tarapore was constituted to go
into the merits of full convertibility on capital accounts. RBI has initiated measures
for freeing the interest rate structure. It has also envisioned Mumbai Inter Bank
Offer Rate (MIBOR) on the line of London Inter-Bank Offer Rate (LIBOR) as a
step towards introducing Futures trading in Interest Rates and Forex. Badla
transactions have been banned in all 23 stock exchanges from July 2001. NSE has
started trading in index options based on the NIFTY and certain Stocks.
A.} EQUITY DERIVATIVES IN INDIA –
In the decade of 1990’s revolutionary changes took place in the

institutional infrastructure in India’s equity market. It has led to wholly new ideas in
market design that has come to dominate the market. These new institutional
arrangements, coupled with the widespread knowledge and orientation towards
equity investment and speculation, have combined to provide an environment
where the equity spot market is now India’s most sophisticated financial market.
One aspect of the sophistication of the equity market is seen in the levels of
market liquidity that are now visible. The market impact cost of doing program
trades of Rs.5 million at the NIFTY index is around 0.2%. This state of liquidity on
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the equity spot market does well for the market efficiency, which will be observed
if the index futures market when trading commences. India’s equity spot market is
dominated by a new practice called ‘Futures – Style settlement’ or account period
settlement. In its present scene, trades on the largest stock exchange (NSE) are
netted from Wednesday morning till Tuesday evening, and only the net open
position as of Tuesday evening is settled. The future style settlement has proved
to be an ideal launching pad for the skills that are required for futures trading.
Stock trading is widely prevalent in India, hence it seems easy to

think that derivatives based on individual securities could be very important. The
index is the counter piece of portfolio analysis in modern financial economies.
Index fluctuations affect all portfolios. The index is much harder to manipulate. This
is particularly important given the weaknesses of Law Enforcement in India, which
have made numerous manipulative episodes possible. The market capitalization
of the NSE-50 index is Rs.2.6 trillion. This is six times larger than the market
capitalization of the largest stock and 500 times larger than stocks such as Sterlite,
BPL and Videocon. If market manipulation is used to artificially obtain 10% move
in
the price of a stock with a 10% weight in the NIFTY, this yields a 1% in the NIFTY.
Cash settlements, which is universally used with index derivatives, also helps in
terms of reducing the vulnerability to market manipulation, in so far as the ‘short-
squeeze’ is not a problem. Thus, index derivatives are inherently less vulnerable
to market manipulation.
A good index is a sound trade of between diversification and liquidity.

In India the traditional index- the BSE – sensitive index was created by a committee
of stockbrokers in 1986. It predates a modern understanding of issues
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in index construction and recognition of the pivotal role of the market index in
modern finance. The flows of this index and the importance of the market index
in modern finance, motivated the development of the NSE-50 index in late 1995.
Many mutual funds have now adopted the NIFTY as the benchmark for their
performance evaluation efforts. If the stock derivatives have to come about, should
be restricted to the most liquid stocks. Membership in the NSE-50 index appeared
to be a fair test of liquidity. The 50 stocks in the NIFTY are assuredly the most liquid
stocks in India.
The choice of Futures vs. Options is often debated. The difference

between these instruments is smaller than, commonly imagined, for a futures
position is identical to an appropriately chosen long call and short put position.
Hence, futures position can always be created once options exist. Individuals or
firms can choose to employ positions where their downside and exposure is
capped by using options. Risk management of the futures clearing is more complex
when options are in the picture. When portfolios contain options, the calculation of
initial price requires greater skill and more powerful computers. The skills required
for pricing options are greater than those required in pricing futures.
5. REVIEW OF LITERATURE
Behavior of Stock Market Volatility after Derivatives

Golaka C Nath, Research Paper (NSE)
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Financial market liberalization since early 1990s has brought about major changes in
the financial markets in India. The creation and empowerment of Securities and
Exchange Board of India (SEBI) has helped in providing higher level accountability in
the market. New institutions like National Stock Exchange of India (NSEIL), National
Securities Clearing Corporation (NSCCL), and National Securities Depository
(NSDL) have been the change agents and helped cleaning the system and provided
safety to investing public at large. With modern technology in hand, these institutions
did set benchmarks and standards for others to follow. Microstructure changes
brought about reduction in transaction cost that helped investors to lock in a deal
faster and cheaper. One decade of reforms saw implementation of policies that have
improved transparency in the system, provided for cheaper mode of information
dissemination without much time delay, better corporate governance, etc. The capital
market witnessed a major transformation and structural change during the period.
The reforms process have helped to improve efficiency in information dissemination,
enhancing transparency, prohibiting unfair trade practices like insider trading and
price rigging. Introduction of derivatives in Indian capital market was initiated by the
Government through L C Gupta Committee report. The L.C. Gupta Committee on
Derivatives had recommended in December 1997 the introduction of stock index
futures in the first place to be followed by other products once the market matures.
The preparation of regulatory framework for the operations of the index futures
contracts took some more time and finally futures on benchmark indices were
introduced in June 2000 followed by options on indices in June 2001 followed by
options on individual stocks in July 2001 and finally followed by futures on individual
stocks in November 2001.
Do Futures and Options trading increase stock market volatility?

Dr. Premalata Shenbagaraman , Research Paper (NSE)
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Numerous studies on the effects of futures and options listing on the underlying cash
market volatility have been done in the developed markets. The empirical evidence
is mixed and most suggest that the introduction of derivatives do not destabilize the
underlying market. The studies also show that the introduction of derivative contracts
improves liquidity and reduces informational asymmetries in the market. In the late
nineties, many emerging and transition economies have introduced derivative
contracts, raising interesting issues unique to these markets. Emerging stock
markets operate in very different economic, political, technological and social
environments than markets in developed countries like the USA or the UK. This
paper explores the impact of the introduction of derivative trading on cash market
volatility using data on stock index futures and options contracts traded on the S & P
CNX Nifty (India). The results suggest that futures and options trading have not led
to a change in the volatility of the underlying stock index, but the nature of volatility
seems to have changed post-futures. We also examine whether greater futures
trading activity (volume and open interest) is associated with greater spot market
volatility. We find no evidence of any link between trading activity variables in the
futures market and spot market volatility. The results of this study are especially
important to stock exchange officials and regulators in designing trading
mechanisms and contract specifications for derivative contracts, thereby enhancing
their value as risk management tools.
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6. DEVELOPMENT OF DERIVATIVES MARKET IN INDIA:
The first step towards introduction of derivatives trading in India was the
promulgation of the Securities Laws (Amendment) Ordinance, 1995, which withdrew
the prohibition on options in securities. The market for derivatives, however, did not
take off, as there was no regulatory framework to govern trading of derivatives. SEBI
set up a 24–member committee under the Chairmanship of Dr.L.C.Gupta on
November 18, 1996 to develop appropriate regulatory framework for derivatives
trading in India. The committee submitted its report on March 17, 1998 prescribing
necessary pre–conditions for introduction of derivatives trading in India. The
committee recommended that derivatives should be declared as ‘securities’ so that
regulatory framework applicable to trading of ‘securities’ could also govern trading of
securities. SEBI also set up a group in June 1998 under the Chairmanship of
Prof.J.R.Varma, to recommend measures for risk containment in derivatives market in
India. The report, which was submitted in October 1998, worked out the operational
details of margining system, methodology for charging initial margins, broker net
worth, deposit requirement and real–time monitoring requirements. The Securities
Contract Regulation Act (SCRA) was amended in December 1999 to include
derivatives within the ambit of ‘securities’ and the regulatory framework was developed
for governing derivatives trading. The act also made it clear that derivatives shall be
legal and valid only if such contracts are traded on a recognized stock exchange, thus
precluding OTC derivatives. The government also rescinded in March 2000, the three
decade old notification, which prohibited forward trading in securities. Derivatives
trading commenced in India in June 2000 after SEBI granted the final approval to this
effect in May 2001. SEBI permitted the derivative segments of two stock exchanges,
NSE and BSE, and their clearing house/corporation to commence trading and
settlement in approved derivatives contracts.
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The trading in BSE Sensex options commenced on June 4, 2001 and the trading
in options on individual securities commenced in July 2001. Futures contracts on
individual stocks were launched in November 2001. The derivatives trading on
NSE commenced with S&P CNX Nifty Index futures on June 12, 2000. The trading
in index options commenced on June 4, 2001 and trading in options on individual
securities commenced on July 2, 2001. Single stock futures were launched on
November 9, 2001. The index futures and options contract on NSE are based on
S&P CNX Trading and settlement in derivative contracts is done in accordance
with the rules, byelaws, and regulations of the respective exchanges and their
clearing house/corporation duly approved by SEBI and notified in the official
gazette. Foreign Institutional Investors (FIIs) are permitted to trade in all Exchange
traded derivative products.
The following are some observations based on the trading statistics provided in the
NSE report on the futures and options (F&O):
• Single-stock futures continue to account for a sizable proportion of the F&O

segment. It constituted 70 per cent of the total turnover during June 2002. A
primary reason attributed to this phenomenon is that traders are comfortable
with single-stock futures than equity options, as the former closely resembles
the erstwhile badla system.
• On relative terms, volumes in the index options segment continues to remain

poor. This may be due to the low volatility of the spot index.
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Typically, options are;

• Considered more valuable when the volatility of the underlying (in this case,
the index) is high. A related issue is that brokers do not earn high
commissions by recommending index options to their clients, because low
volatility leads to higher waiting time for round-trips.
• Put volumes in the index options and equity options segment have increased
since January 2002. The call-put volumes in index options have decreased
from 2.86 in January 2002 to 1.32 in June. The fall in call-put volumes ratio
suggests that the traders are increasingly becoming pessimistic on the
market.
• Farther month futures contracts are still not actively traded. Trading in equity
options on most stocks for even the next month was non-existent.
• Daily option price variations suggest that traders use the F&O segment as a
less risky alternative (read substitute) to generate profits from the stock price
movements. The fact that the option premiums tail intra-day stock prices is
evidence to this. If calls and puts are not looked as just substitutes for spot
trading, the intra-day stock price variations should not have a one-to-one
impact on the option premiums.
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7. FACTORS CONTRIBUTING TO THE GROWTH OF

DERIVATIVES:
Factors contributing to the explosive growth of derivatives are price

volatility, globalization of the markets, technological developments and advances
in the financial theories.
A.} PRICE VOLATILITY –
A price is what one pays to acquire or use something of value. The

objects having value maybe commodities, local currency or foreign currencies.
The concept of price is clear to almost everybody when we discuss commodities.
There is a price to be paid for the purchase of food grain, oil, petrol, metal, etc. the
price one pays for use of a unit of another person’s money is called interest rate.
And the price one pays in one’s own currency for a unit of another currency is
called as an exchange rate.
Prices are generally determined by market forces. In a market,

consumers have ‘demand’ and producers or suppliers have ‘supply’, and the
collective interaction of demand and supply in the market determines the price.
These factors are constantly interacting in the market causing changes in the price
over a short period of time. Such changes in the price is known as ‘price volatility’.
This has three factors: the speed of price changes, the frequency of price changes
and the magnitude of price changes.
The changes in demand and supply influencing factors culminate in

market adjustments through price changes. These price changes expose
individuals, producing firms and governments to significant risks. The breakdown
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of the BRETTON WOODS agreement brought an end to the stabilizing role of fixed
exchange rates and the gold convertibility of the dollars. The globalization of the
markets and rapid industrialization of many underdeveloped countries brought a
new scale and dimension to the markets. Nations that were poor suddenly became
a major source of supply of goods. The Mexican crisis in the south east-Asian
currency crisis of 1990’s have also brought the price volatility factor on the surface.
The advent of telecommunication and data processing bought information very
quickly to the markets. Information which would have taken months to impact the
market earlier can now be obtained in matter of moments. Even equity holders are
exposed to price risk of corporate share fluctuates rapidly.
These price volatility risk pushed the use of derivatives like futures
and options increasingly as these instruments can be used as hedge to protect
against adverse price changes in commodity, foreign exchange, equity shares and
bonds.
B.} GLOBALISATION OF MARKETS –
Earlier, managers had to deal with domestic economic concerns;

what happened in other part of the world was mostly irrelevant. Now globalization
has increased the size of markets and as greatly enhanced competition .it has
benefited consumers who cannot obtain better quality goods at a lower cost. It has
also exposed the modern business to significant risks and, in many cases, led to
cut profit margins
In Indian context, south East Asian currencies crisis of 1997 had

affected the competitiveness of our products vis-à-vis depreciated currencies.
Export of certain goods from India declined because of this crisis. Steel industry in
1998 suffered its worst set back due to cheap import of steel from south East
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Asian countries. Suddenly blue chip companies had turned in to red. The fear of
china devaluing its currency created instability in Indian exports. Thus, it is evident
that globalization of industrial and financial activities necessitates use of derivatives
to guard against future losses. This factor alone has contributed to the growth of
derivatives to a significant extent.
C.} TECHNOLOGICAL ADVANCES –
A significant growth of derivative instruments has been driven by technological

breakthrough. Advances in this area include the development of high speed
processors, network systems and enhanced method of data entry. Closely related to
advances in computer technology are advances in telecommunications.
Improvement in communications allow for instantaneous worldwide conferencing,
Data transmission by satellite. At the same time there were significant advances in
software programs without which computer and telecommunication advances would
be meaningless. These facilitated the more rapid movement of information and
consequently its instantaneous impact on market price.
Although price sensitivity to market forces is beneficial to the economy as a whole

resources are rapidly relocated to more productive use and better rationed overtime
the greater price volatility exposes producers and consumers to greater price risk. The
effect of this risk can easily destroy a business which is otherwise well managed.
Derivatives can help a firm manage the price risk inherent in a market economy. To
the extent the technological developments increase volatility, derivatives and risk
management products become that much more important.
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D.} ADVANCES IN FINANCIAL THEORIES –
Advances in financial theories gave birth to derivatives. Initially forward contracts in its
traditional form, was the only hedging tool available. Option pricing models developed
by Black and Scholes in 1973 were used to determine prices of call and put options.
In late 1970’s, work of Lewis Edeington extended the early work of Johnson and
started the hedging of financial price risks with financial futures. The work of economic
theorists gave rise to new products for risk management which led to the growth of
derivatives in financial markets.
The above factors in combination of lot many factors led to growth of derivatives
instruments.
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8. TYPES OF DERIVATIVES:
There are mainly four types of derivatives i.e. Forwards, Futures, Options and
swaps.
Derivatives
Forwards Futures Options Swaps
FORWARDS -
A contract that obligates one counter party to buy and the other to sell a specific
underlying asset at a specific price, amount and date in the future is known as a
forward contract. Forward contracts are the important type of forward-based
derivatives. They are the simplest derivatives. There is a separate forward market
for multitude of underlying, including the traditional agricultural or physical
commodities, as well as currencies and interest rates. The change in the value of
a forward contract is roughly proportional to the change in the value of its
underlying asset. These contracts create credit exposures. As the value of the
contract is conveyed only at the maturity, the parties are exposed to the risk of
default during the life of the contract. Forward contracts are customized with the
terms and conditions tailored to fit the particular business, financial or risk
management objectives of the counter parties. Negotiations often take place with
respect to contract size, delivery grade, delivery locations, delivery dates and credit
terms.
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• FUTURES -
A future contract is an agreement between two parties to buy or sell an asset at a

certain time the future at the certain price. Futures contracts are the special types of
forward contracts in the sense that are standardized exchange-traded contracts.
Equities, bonds, hybrid securities and currencies are the commodities of the
investment business. They are traded on organized exchanges in which a clearing
house interposes itself between buyer and seller and guarantees all transactions, so
that the identity of the buyer or the seller is a matter of indifference to the opposite
party. Futures contract protect those who use these commodities in their business.
Futures trading are to enter into contracts to buy or sell financial instruments, dealing
in commodities or other financial instruments for forward delivery or settlement on
standardized terms. The futures market facilitates stock holding and shifting of risk.
They act as a mechanism for collection and distribution of information and then
perform a forward pricing function. The futures trading can be performed when there
is variation in the price of the actual commodity and there exists economic agents
with commitments in the actual market. There must be a possibility to specify a
standard grade of the commodity and to measure deviations from this grade. A
futures market is established specifically to meet purely speculative demands is
possible but is not known. Conditions which are thought of necessary for the
establishment of futures trading are the presence of speculative capital and financial
facilities for payment of margins and contract settlement. In addition, a strong
infrastructure is required, including financial, legal and communication systems.
25
• OPTIONS -
A derivative transaction that gives the option holder the right but not the obligation
to buy or sell the underlying asset at a price, called the strike price, during a period
or on a specific date in exchange for payment of a premium is known as ‘option’.
Underlying asset refers to any asset that is traded. The price at which the
underlying is traded is called the ‘strike price’.
There are two types of options i.e., CALL OPTION AND PUT OPTION.
a. CALL OPTION :
A contract that gives its owner the right but not the obligation to buy an
underlying asset-stock or any financial asset, at a specified price on or
before a specified date is known as a ‘Call option’. The owner makes a
profit provided he sells at a higher current price and buys at a lower future
price.
b. PUT OPTION:
A contract that gives its owner the right but not the obligation to sell an
underlying asset-stock or any financial asset, at a specified price on or
before a specified date is known as a ‘Put option’. The owner makes a
profit provided he buys at a lower current price and sells at a higher future
price. Hence, no option will be exercised if the future price does not
increase.
26
Put and calls are almost always written on equities, although occasionally
preference shares, bonds and warrants become the subject of options.
The other kind of derivatives, which are not, much popular are as follows:
• BASKETS -
Baskets options are option on portfolio of underlying asset. Equity Index Options are
most popular form of baskets.
• LEAPS -
Normally option contracts are for a period of 1 to 12 months. However, exchange may
introduce option contracts with a maturity period of 2-3 years. These long-term option
contracts are popularly known as Leaps or Long term Equity Anticipation Securities.
• WARRANTS -
Options generally have lives of up to one year, the majority of options traded on
options exchanges having a maximum maturity of nine months. Longer-dated
options are called warrants and are generally traded over-the-counter.
DIFFERENCE BETWEEN FUTURES AND FORWARDS
27
Futures Forwards
Margin deposits are to be required of Typically, no money changes hands

all participants. until delivery, although a small
margin deposit might be required of
non-dealer customers on certain
occasions.
Contract terms are standardized All contract terms are negotiated
with all buyers and sellers privately by the parties.
negotiating only with respect to
price.
Non-member participants deal Participants deal typically on a
through brokers (exchange principal-to-principal basis.
members who represent them on the
exchange floor)
Participants include banks, Participants are primarily institutions
corporations, financial institutions, dealing with one other and other
individual investors, and interested parties dealing through
speculators. one or more dealers.
The clearing house of the exchange A participant must examine the
becomes the opposite side to each credit risk and establish credit limits
cleared transactions; therefore, the for each opposite party.
credit risk for a futures market
participant is always the same and
there is no need to analyse the credit
of other market participants.
28
Settlements are made daily through Settlement occurs on date agreed

the exchange clearing house. Gains upon between the parties to each
on open positions may be transaction.
withdrawn and losses are collected
daily.
Long and short positions are usually Forward positions are not as easily
liquidated easily. offset or transferred to the other
participants.
Settlements are normally made in Most transactions result in delivery.

cash, with only a small percentage of
all contracts resulting actual
delivery.
A single, round trip (in and out of the No commission is typically charged
market) commission is charged. It is if the transaction is made directly
negotiated between broker and with another dealer. A commission
customer and is relatively small in is charged to born buyer and seller,
relation to the value of the contract. however, if transacted through a
broker.
Trading is regulated. Trading is mostly unregulated.
The delivery price is the spot price. The delivery price is the forward
price.
29
9. PARTICIPANTS IN THE DERIVATIVES MARKET:
The participants in the derivatives market are as follows:
A.} TRADING PARTICIPANTS:
1.] HEDGERS –
The process of managing the risk or risk management is called as hedging.

Hedgers are those individuals or firms who manage their risk with the help of
derivative products. Hedging does not mean maximising of return. The main
purpose for hedging is to reduce the volatility of a portfolio by reducing the risk.
2.] SPECULATORS –
Speculators do not have any position on which they enter into futures and options
Market i.e., they take the positions in the futures market without having position in
the underlying cash market. They only have a particular view about future price of
a commodity, shares, stock index, interest rates or currency. They consider various
factors like demand and supply, market positions, open interests, economic
fundamentals, international events, etc. to make predictions. They take risk in turn
from high returns. Speculators are essential in all markets – commodities, equity,
interest rates and currency. They help in providing the market the much desired
volume and liquidity.
30
3.] ARBITRAGEURS –
Arbitrage is the simultaneous purchase and sale of the same underlying in two
different markets in an attempt to make profit from price discrepancies between the
two markets. Arbitrage involves activity on several different instruments or assets
simultaneously to take advantage of price distortions judged to be only temporary.
Arbitrage occupies a prominent position in the futures world. It is the mechanism

that keeps prices of futures contracts aligned properly with prices of underlying
assets. The objective is simply to make profits without risk, but the complexity of
arbitrage activity is such that it is reserved to particularly well-informed and
experienced professional traders, equipped with powerful calculating and data
processing tools. Arbitrage may not be as easy and costless as presumed.
B.} INTERMEDIARY PARTICIPANTS:
4.] BROKERS –
For any purchase and sale, brokers perform an important function of bringing
buyers and sellers together. As a member in any futures exchanges, may be any
commodity or finance, one need not be a speculator, arbitrageur or hedger. By
virtue of a member of a commodity or financial futures exchange one get a right to
transact with other members of the same exchange. This transaction can be in the
pit of the trading hall or on online computer terminal. All persons hedging their
transaction exposures or speculating on price movement, need not be and for that
matter cannot be members of futures or options exchange. A non-member has to
deal in futures exchange through member only. This provides a member the role
of a broker. His existence as a broker takes the benefits of the futures and options
exchange to the entire economy all transactions are done in the name of the
31
member who is also responsible for final settlement and delivery. This activity of a
member is price risk free because he is not taking any position in his account, but
his other risk is clients default risk. He cannot default in his obligation to the clearing
house, even if client defaults. So, this risk premium is also inbuilt in brokerage
recharges. More and more involvement of non-members in hedging and
speculation in futures and options market will increase brokerage business for
member and more volume in turn reduces the brokerage. Thus more and more
participation of traders other than members gives liquidity and depth to the futures
and options market.
5.] MARKET MAKERS AND JOBBERS –
Even in organized futures exchange, every deal cannot get the counter party
immediately. It is here the jobber or market maker plays his role. They are the
members of the exchange who takes the purchase or sale by other members in
their books and Then Square off on the same day or the next day. They quote their
bid-ask rate regularly. The difference between bid and ask is known as bid-ask
spread. When volatility in price is more, the spread increases since jobbers price
risk increases. In less volatile market, it is less. Generally, jobbers carry limited risk.
Even by incurring loss, they square off their position as early as possible. Since
they decide the market price considering the demand and supply of the commodity
or asset, they are also known as market makers. Their role is more important in
the exchange where outcry system of trading is present. A buyer or seller of a
particular futures or option contract can approach that particular jobbing counter
and quotes for executing deals. In automated screen based trading best buy and
sell rates are displayed on screen, so the role of jobber to some extent. In any
case, jobbers provide liquidity and volume to any futures and option market.
C.} INSTITUTIONAL FRAMEWORK:
32
6.] EXCHANGE –
Exchange provides buyers and sellers of futures and option contract necessary
infrastructure to trade. In outcry system, exchange has trading pit where members
and their representatives assemble during a fixed trading period and execute
transactions. In online trading system, exchange provide access to members and
make available real time information online and also allow them to execute their
orders. For derivative market to be successful exchange plays a very important
role, there may be separate exchange for financial instruments and commodities
or common exchange for both commodities and financial assets.
7.] CLEARING HOUSE –
A clearing house performs clearing of transactions executed in futures and option

exchanges. Clearing house may be a separate company or it can be a division of
exchange. It guarantees the performance of the contracts and for this purpose
clearing house becomes counter party to each contract. Transactions are between
members and clearing house. Clearing house ensures solvency of the members
by putting various limits on him. Further, clearing house devises a good managing
system to ensure performance of contract even in volatile market. This provides
confidence of people in futures and option exchange. Therefore, it is an important
institution for futures and option market.
8.] CUSTODIAN / WARE HOUSE –
33
Futures and options contracts do not generally result into delivery but there has to
be smooth and standard delivery mechanism to ensure proper functioning of
market. In stock index futures and options which are cash settled contracts, the
issue of delivery may not arise, but it would be there in stock futures or options,
commodity futures and options and interest rates futures. In the absence of proper
custodian or warehouse mechanism, delivery of financial assets and commodities
will be a cumbersome task and futures prices will not reflect the equilibrium price
for convergence of cash price and futures price on maturity, custodian and
warehouse are very relevant.
9.] BANK FOR FUND MOVEMENTS –
Futures and options contracts are daily settled for which large fund movement from
members to clearing house and back is necessary. This can be smoothly handled
if a bank works in association with a clearing house. Bank can make daily
accounting entries in the accounts of members and facilitate daily settlement a
routine affair. This also reduces a possibility of any fraud or misappropriation of
fund by any market intermediary.
10.] REGULATORY FRAMEWORK –
A regulator creates confidence in the market besides providing Level playing field
to all concerned, for foreign exchange and money market, RBI is the regulatory
authority so it can take initiative in starting futures and options trade in currency
and interest rates. For capital market, SEBI is playing a lead role, along with
physical market in stocks, it will also regulate the stock index futures to be started
very soon in India.
10. ROLE OF DERIVATIVES:
34
1.] RISK MANAGEMENT –
Futures and options contract can be used for altering the risk of investing in spot
market. For instance, consider an investor who owns an asset. He will always be
worried that the price may fall before he can sell the asset. He can protect himself
by selling a futures contract, or by buying a Put option. If the spot price falls, the
short hedgers will gain in the futures market, as you will see later. This will help
offset their losses in the spot market. Similarly, if the spot price falls below the
exercise price, the put option can always be exercised.
Derivatives markets help to reallocate risk among investors. A person who wants
to reduce risk, can transfer some of that risk to a person who wants to take more
risk. Consider a risk-averse individual. He can obviously reduce risk by hedging.
When he does so, the opposite position in the market may be taken by a speculator
who wishes to take more risk. Since people can alter their risk exposure using
futures and options, derivatives markets help in the raising of capital. As an
investor, you can always invest in an asset and then change its risk to a level that
is more acceptable to you by using derivatives.
2.] PRICE DISCOVERY –
Price discovery refers to the markets ability to determine true equilibrium prices.
Futures prices are believed to contain information about future spot prices and help
in disseminating such information. As we have seen, futures markets provide a low
cost trading mechanism. Thus information pertaining to supply and demand easily
percolates into such markets. Accurate prices are essential for ensuring the correct
allocation of resources in a free market economy. Options markets provide
information about the volatility or risk of the underlying asset.
3.] OPERATIONAL ADVANTAGES –
35
As opposed to spot markets, derivatives markets involve lower transaction costs.

Secondly, they offer greater liquidity. Large spot transactions can often lead to
significant price changes. However, futures markets tend to be more liquid than
spot markets, because herein you can take large positions by depositing relatively
small margins. Consequently, a large position in derivatives markets is relatively
easier to take and has less of a price impact as opposed to a transaction of the
same magnitude in the spot market. Finally, it is easier to take a short position in
derivatives markets than it is to sell short in spot markets.
4.] MARKET EFFICIENCY –
The availability of derivatives makes markets more efficient; spot, futures and
options markets are inextricably linked. Since it is easier and cheaper to trade in
derivatives, it is possible to exploit arbitrage opportunities quickly and to keep
prices in alignment. Hence these markets help to ensure that prices reflect true
values.
5.] EASE OF SPECULATION –
Derivative markets provide speculators with a cheaper alternative to engaging in

spot transactions. Also, the amount of capital required to take a comparable
position is less in this case. This is important because facilitation of speculation is
critical for ensuring free and fair markets. Speculators always take calculated risks.
A speculator will accept a level of risk only if he is convinced that the associated
expected return, is commensurate with the risk that he is taking.
11. RESEARCH METHODOLOGY
36
Achieving accuracy in any research requires a deep study regarding the subject. The
prime objective of this research is to know investors perception towards derivatives
market in India.
OBJECTIVES OF THE STUDY
➢ To understand the concept of the Financial Derivatives such as Forwards,

Futures, Options and Swaps
➢ To know the participation of Investors in Financial Derivative Markets
➢ To know the Strategy used by Investors While Trading in derivatives

market
➢ To know the Expected return by Investors in Financial Derivatives Market
➢ To study the Investors Preference for selecting types of Derivatives for

Investment
➢ To know the Investment Experience of Investors in Derivative Market
➢ To know the Investors having any Training in Derivatives Market from NSE,
BSE or any Broking firm before trading
➢ To know the Investors preference of interest in kinds of Derivatives for

Investment
DATA BASE
Present study is based on primary data. The primary data was collected with help of
structured questionnaire to examine the awareness level as well as perceptions of
37
investors about the derivatives market in India. The questionnaire includes 10 close
ended questions.
For the collection of data, 100 respondents were chosen.
SAMPLING: -
Convenience sampling
Convenience sampling, as the name implies is a specific type of non-probability

sampling method that relies on data collection from population members who are
conveniently available to participate in study.
SAMPLE SIZE : - “100 UNIT”

Sample size is an important concept in statistics, and refers to the number of individual
pieces of data collected in a survey. A survey or statistic's sample size is important in
determining the accuracy and reliability of a survey's findings.
DATA COLLECTION METHOD

➢ Primary data
➢ Secondary data
PRIMARY DATA:-
Data used in research originally obtained through the direct efforts of the researcher
through surveys, interviews and direct observation.
SECONDARY DATA:-
38
Secondary data is the data that have been already collected by and readily available
from other sources. Such data are cheaper and more quickly obtainable than the
primary data and also may be available when primary data cannot be obtained at all.
TOOLS OF THE COLLECTION OF DATA

➢ Primary data was collected through Questionnaire where Respondent give
there valuable suggestions and feedback
➢ Secondary data was collected through different websites on the internet.
➢ Journals and Magazines related to derivatives which are issued Weekly,

Fortnight and Monthly.
39
12. DATA ANALYSIS & INTERPRETATION
Q.1) Do you trade in Derivatives market?
Age
Yes
42%
No
58%
Yes No
INTERPRETATION
Above Pie Chart shows that only 42% of the sample units actually trade in derivatives
market. The primary reason for less participation was lack of knowledge of leverage
and how to earn money by applying various strategies.
40
Q.2 Please enter occupation details.
Occupation
Service Sector
Any other sector
14%
18%
Business Sector
Profession Sector 36%
32%
Service Sector Business Sector Profession Sector Any other sector
INTERPRETATION
Above Pie Chart Shows that:-
➢ 14% of the investors belong to service Sector.
➢ 36% of the investors belong to Business Sector.
➢ 32% of the investors belong to Profession Sector.
➢ 18% of the investors belong to Any Other Sector.
41
Q.3 What is your income? (Per Annum)
Annual Income
8 above
14%
Upto 3 lakhs
30%
6-8 lakhs
22%
3-6 lakhs
34%
Upto 3 lakhs 3-6 lakhs 6-8 lakhs 8 above
INTERPRETATION
➢ 30% of the investors Annual Income is Up to 3 Lakhs
➢ 34% of the investors Annual Income is 3-6 Lakhs
➢ 22% of the investors Annual Income is 6-8 Lakhs
➢ 14% of the investors Annual Income is 8 & Above Lakhs
42
Q.4 You like to participate in Derivatives market as:-
Participation in Derivatives market as
Other
10%
Arbitrageur
14%
Hedger
52%
Speculator
24%
Hedger Speculator Arbitrageur Other
INTERPRETATION
➢ 52% of the investors use derivatives to hedge their position.
➢ 24% of the investors use derivatives to speculate.
➢ 14% of the investors use derivatives to arbitrage.
➢ 10% of the investors use derivatives for other things.
43
Q.5 Do you use any strategies while trading in derivatives?
Using strategy in Derivatives Market
Yes
48%
No
52%
Yes No
INTERPRETATION
➢ 48% of the Investors are using some kind of Strategy in Derivatives Market
➢ 52% of the Investors are not using any Strategy in Derivatives Market
44
Q.6 What is the rate of return expected by you from Derivative market?
Expected Investor's rate of return in derivative market
More than 10%

24%
Don't trade
44%
5-10%
16%
Less than 5%
16%
Don't trade Less than 5% 5-10% More than 10%
INTERPRETATION
➢ 44% of the Investors don’t trade in derivatives.
➢ 16% of the Investors expect a rate of return less than 5%
➢ 16% of the Investors expect a rate of return less than 5-10%
➢ 24% of the Investors expect a rate of return more than 10%
45
Q.7 Satisfaction level in Derivative market:-
Satisfaction level in derivative market

Neutral
14%
Low
6%
Do not trade
High
Low
High Do not trade Neutral
20% 60%
INTERPRETATION
➢ 60% of the Investors don’t trade in Derivative Market.
➢ Satisfaction level is high for 20% of the investors.
➢ Satisfaction level is low for 6% of the investors.
➢ It’s neutral for 14% of the investors.
46
Q.8 What kind of Derivatives investment do you prefer?
Investors prefer in Derivative

Swap
Forward
16%
22%
Forward
Future
Option
Option Swap
29%
Future
33%
INTERPRETATION
➢ 22% of the Investors prefer investment in Forwards.
➢ 33% of the Investors prefer investment in Futures.
➢ 29% of the Investors prefer investment in Option.
➢ 16% of the Investors prefer investment in Swap
47
Q.9 Have you undergone any training in derivatives from NSE, BSE or Broking Firms
before starting trading in Derivatives Market?
Training in NSE, BSE for Derivative Market
Yes
32%
Yes
No
No
68%
INTERPRETATION
➢ 32% of the Investors got Training in NSE, BSE for Derivative Market.
➢ 68% of the Investors didn’t get Training in NSE, BSE for Derivative Market.
48
Q.10 Which Derivatives Market would you like to invest in?
Investor Investing in Derivative Market

Any Other
12%
Commodity
14% Equity
Currency
Commodity
Any Other
Equity
Currency
62%
12%
INTERPRETATION
➢ 62% of the investors invest in Equity Market in Derivative.
➢ 12% of the investors invest in Currency Market in Derivative.
➢ 14% of the investors invest in Commodity Market in Derivative.
➢ 12% of the investors invest in Any Other Market in Derivative
49
Analysis
After studying the responses I learnt that derivatives is still an evolving concept in
India. Only 40% of the sample units actually trade in derivatives. The primary reason
for less participation was lack of knowledge of leverage and how to earn money by
applying various strategies. The people who traded in derivatives were mostly using
derivatives to hedge and speculate. They believed derivatives would amplify and
give them a higher return of 15-25%. Equity Derivatives was the most favored
products and 62% of the people traded in equity based options or futures. People
were neutral about rating the current derivatives market in India.
50
13. CONCLUSION
➢ In the recent years advances in financial markets and the technology have
made derivatives easy for the investors.
➢ Derivatives market in India is growing rapidly unlike equity markets. Trading in

derivatives require more than average understanding of finance. Being new to
markets maximum number of investors have not yet understood the full
implications of the trading in derivatives. SEBI should take actions to create
awareness in investors about the derivative market.
➢ Introduction of derivatives implies better risk management. These markets can

give greater depth, stability and liquidity to Indian capital markets. Successful
risk management with derivatives requires a thorough understanding of
principles that govern the pricing of financial derivatives.
➢ In order to increase the derivatives market in India SEBI should revise some of
their regulation like contract size, participation of FII in the derivative market.
Contract size should be minimized because small investor cannot afford this
much of huge premiums.
➢ In cash market the profit/loss is limited but where in F& O an investor can enjoy
unlimited profits/loss.
.
➢ The derivatives are mainly used for hedging purpose.
➢ In cash market the investor has to pay the total money, but in derivatives the
investor has to pay premiums or margins, which are some percentage of total
one.
In derivative segment the profit/loss of the option holder/option writer is purely
depended on the fluctuations
51
14. BIBLIOGRAPGHY:-
WEBSITES:-
➢ www.indiaifoline.com
➢ www.nseindia.org
➢ www.moneycontrol.com
➢ www.bseindia.com
➢ www.unicon.com
➢ www.sebi.gov.in
➢ http://www.nseindia/content/fo/fo_historicaldata.htm
➢ http://www.nseindia/content/equities/eq_historicaldata.htm
BOOKS
➢ Derivatives Market in India – Susan Thomas

➢ Financial Derivatives – V. K. Bhalla
52

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“EQUITY DERIVATES MARKET IN INDIA AND INVESTORS

PERCEPTION TOWARDS DERIVATIVE MARKETS”

Bachelor of Management Studies

Deepesh Chandru Vishnani

Kishinchand Chellaram College Vidyasagar Principal K.M. Kundnani

I, Deepesh Vishnani the student of T.Y.B.M.S. Semester V (2017-2018) hereby

The information submitted is true and original to the best of my knowledge.

Course Coordinator Principal

I would also like to express my sincere gratitude towards my project

9 Participants in the Derivatives Market 30

12 Data Interpretation and Analysis 40

Derivatives are one of the most complex instruments. The word

Derivatives are very similar to insurance. Insurance protects against

In this era of globalization, the world is a riskier place and exposure

Derivative products, several centuries ago, emerged as hedging

Presently, most major institutional borrowers and investors use

Derivatives contracts are used to counter the price risks involved in

According to Securities Contracts (Regulation) Act, 1956

➢ A security derived from a debt instrument, share, loan, whether secured or

Derivatives are securities under the Securities Contract (Regulation)

The history of derivatives is quite colorful and surprisingly a lot longer

The first organized commodity exchange came into existence in the

A.} EQUITY DERIVATIVES IN INDIA –

In the decade of 1990’s revolutionary changes took place in the

Stock trading is widely prevalent in India, hence it seems easy to

A good index is a sound trade of between diversification and liquidity.

The choice of Futures vs. Options is often debated. The difference

Behavior of Stock Market Volatility after Derivatives

Do Futures and Options trading increase stock market volatility?

6. DEVELOPMENT OF DERIVATIVES MARKET IN INDIA:

• Single-stock futures continue to account for a sizable proportion of the F&O

• On relative terms, volumes in the index options segment continues to remain

Typically, options are;

7. FACTORS CONTRIBUTING TO THE GROWTH OF

Factors contributing to the explosive growth of derivatives are price

A.} PRICE VOLATILITY –

A price is what one pays to acquire or use something of value. The

Prices are generally determined by market forces. In a market,

The changes in demand and supply influencing factors culminate in

B.} GLOBALISATION OF MARKETS –

Earlier, managers had to deal with domestic economic concerns;

In Indian context, south East Asian currencies crisis of 1997 had

C.} TECHNOLOGICAL ADVANCES –

A significant growth of derivative instruments has been driven by technological

Although price sensitivity to market forces is beneficial to the economy as a whole

D.} ADVANCES IN FINANCIAL THEORIES –

Forwards Futures Options Swaps

A future contract is an agreement between two parties to buy or sell an asset at a

DIFFERENCE BETWEEN FUTURES AND FORWARDS

Margin deposits are to be required of Typically, no money changes hands

Settlements are made daily through Settlement occurs on date agreed

Settlements are normally made in Most transactions result in delivery.

Trading is regulated. Trading is mostly unregulated.

9. PARTICIPANTS IN THE DERIVATIVES MARKET:

The participants in the derivatives market are as follows:

A.} TRADING PARTICIPANTS:

The process of managing the risk or risk management is called as hedging.

Arbitrage occupies a prominent position in the futures world. It is the mechanism

B.} INTERMEDIARY PARTICIPANTS:

5.] MARKET MAKERS AND JOBBERS –

C.} INSTITUTIONAL FRAMEWORK:

7.] CLEARING HOUSE –

A clearing house performs clearing of transactions executed in futures and option

8.] CUSTODIAN / WARE HOUSE –